Meaning of Accounting
Accounting is best understood as the language of business. It communicates the results of the business. To communicate information, needs of the users of accounting information are identified and required information is measured by following a systematic process resulting in the creation of “financial statements”.
Accounting system is a man-made system has evolved over a period of time to provide financial information to users of financial statements. In early times, accounting was merely concerned with ascertainment of results of the business. Now a day, there are lots of persons who are interested in a business (e.g. owner, govt., creditors lenders etc.) and the accounting provides them with all the relevant information through financial statements.
American Accounting Association have defined accounting as “The process of identifying, measuring and communicating information to permit judgment and decisions by the users of accounts”
Another definition is given by American Institute of Certified Public Accountants clearly brings out what is done accounting. According to it
“Accounting is an art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least of a financial character and interpreting the results thereof.”
The above definition brings out the following as characteristics of accounting:
1.Accounting is an art: Accounting is classified as an art, as it helps us in attaining our aim of ascertaining the financial results, i.e. profit or loss and financial position.
2.It involves recording, classifying and summarizing: Recording means systematically writing down the transactions and events in account books (in Journal Book) soon after their occurrence. The four basic question needs to answer while recording, i.e. what to record, when to record, how to record, and at what value to record. Classifying is the process of grouping transactions or entries of the same type at one place. This is done by opening accounts in a book called ledger. Summarizing involves the preparation of reports and statements from the classified data (ledger) which are understandable and useful to the management and other interested parties.
3.It records the transaction in terms of money: Accounting records transactions only in terms of money. Because money serves as a common unit of measurement and increases the understanding of the state of affairs of the business.
4.It records only those transactions and events, which are of financial character: accounting records only those transactions, which are of financial character, i.e. which affect the result of business. In other words, personal transactions of businessman are not recorded. But it is to be noted that if a transaction is between proprietor and business then it will be recorded because in this transaction business is involved.
5.It is an art of interpreting the result: it is also an art to determine the financial position of the business, the progress made and how well it is getting along.
Financial statements comprises of:
• Profit and Loss Account (shows profit or loss during a particular year)
• Balance Sheet (shows financial position as at the end of the financial year)
• Cash flow statement (as per listing agreement)